Looking at supply/demand numbers for oil, issued by major agencies like IEA, (and OPEC), demand is abysmal, supply is at extremely high numbers and had resulted in floating storage in VLCCs to accomodate the staggering inventories, and OPEC - though having cut back - is now weakening in its resolve to maintain cuts. YET, the market is beginning to show all the signs of a major breakout. What signs? The contango, or the discount of the spot month to deferred, has sharply contracted. The year to year spread on crude oil was 16 dollars a few months ago and has narrowed to less than 6. Open interest in crude oil is increasing, the hedge fund is back. What is happening? As the article indicates, there are still supply side issues -- not yet a concern from a fundamental point of view due to still very depressed demand. However, as one writer mentioned, US government reflation policies have resulted in a sharply weaker (and likely much weaker) dollar. Since most of the world's major raw materials are quoted and traded in dollars, a devaluation of the dollar will result in higher prices. That is what we are seeing across the board. This week, we made new lows for the dollar for the year, new highs for gold, for coffee, for soybeans, for corn, for wheat, for sugar, crude oil and gasoline. Of course, each commodity has its own story, but the sharply lower dollar is part of that story and a factor that links them all. Take that with stockpiling of oil, grains and metals by China, sharp production cuts in commodities due to CAPEX reduction, the drop in most prices below the cost of production AND....the sidelining of the investment/hedge fund community, you had perfect conditions for a rally in commodities. Now the investment capital is back in derivatives and we are poised for more room to the upside not only in oil, but other commodities as well.

We are living, right now, through the sunset phase of the Oil Age. The wholesale oil price has been rising faster than retail demand since 2003. There have already been several Oil Wars in Kuwait, Iraq and Sudan since 1990. Traders push up the price during an economic recession. Governments kill to secure uncertain supply. These are all classic signs of the end of an era.

vishnagupta said "You know there is a theory going around that the dollar is going to be massively devalued which is why people in the know are pumping money into commodities futures so that they have something tangible to show for their money instead of electronic money rapidly falling in value.

Otherwise there is hardly a reason for a commodities rally when 70% of the word economy is in recession and there is absolutely no supply bottleneck"

Absolutely correct, also with the devaluing dollar and fears of rampant inflation, too many dollars chasing too few goods, we are in for some pain. All I would add is that we are seeing an inflationary spike now as demand has continued to fall off of the proverbial cliff. This I believe is the culprit of the creeping price.

I think oil will reach last year's peak and then exceed it by the middle of 2011 (since we are doing predictions here :) ) once the economy starts to recover and inflation heats up into the double digits. That will be just in time to buy the new cars made from Obama's CAFE standards upgrade.

The price of oil will top out at $70 or so, and then dump again. The reason is simple. The fundamentals of the world economy are horrific. There is no end in sight for at least a decade and probably 15 years.

Yes, we are on the downside of Hubbert's Peak for the world, but economics trumps that.

Long term, we have to replace oil with nuclear and satellite solar power to bring the world economy back up. That will cap the price of oil as it shifts from an energy source to a material for making plastics.

So....we should put more into developing renewable energy is what I can am getting for this article. Oh wait no...we should just continue drilling...because conflicts, choking the economy and pollution are all valuable contributions oil has given us. So drill baby drill? Really? That is what you are telling readers?

You can count on it. In the near long term the price of oil will rise significantly, remain higher, with less available.

Despite "lavish investment in the development of new fields and in exploration," the reason for this is simple: the world will increasingly be running out of oil. We at a historical peak, the top of a bell curve, with all major reserves having been located and accounted for. There will be few and relatively minor exceptions to that from here on out.

We were fortunate in the recent price spike. It portends very well what to expect, only to a greater extent as time passes. The current economic recession will ameliorate this to an extent, as seen, but in future the price of oil will be tempered only to the degree it negatively impacts economies, thus the two declining in tandem. In the short term, with greater extraction from known reserves as economic demand increases, you can expect the illusion of ample supply.

You know there is a theory going around that the dollar is going to be massively devalued which is why people in the know are pumping money into commodities futures so that they have something tangible to show for their money instead of electronic money rapidly falling in value.

Otherwise there is hardly a reason for a commodities rally when 70% of the word economy is in recession and there is absolutely no supply bottleneck.

As oil is used not only in transportation but mostly in big energy plants for factories and houses, if oil costs too much, let producers switch to RENEWABLES, which can be easily used for other than transportation!

Solar and wind energy can be competitive with oil. Moreover, I remember that we have to dismiss fossil fuels to save our planet (and us) from an early end, either high or low oil prices are.

In my experience the economist will publish an article and later they sometimes update it. When they update it the old version is archived along with the comments and we wind up with two articles and mystery comments.

Do a search under the article name in the search box and see if you can find an older version.

Oil always prevails, governments don't. It's sad to see how Chavez continues to expropriate oil contractor companies during these tough times, he is tightening the noose for PDVSA as he tries to expand its tentacles. I am sure oil consumption will balance out as the world recovers from the crisis, but I wonder about the politics that manage oil and the societies that depend on it. Black gold, black curse!!!